To Patent Or Not To Patent: That Is The Question For Startups

The U.S. Supreme Court’s 2014 ruling against the Alice Corporation, which rendered the company’s software patents invalid, left many startups wondering what that decision would mean for their own businesses. Opinions have been divided, with some concluding the case pretty much ends the patent system as we know it and others contending patent law remains relatively unchanged in spite of the ruling. Either way, the subject of patents is something I hear startups asking a lot of questions about — even now, more than 18 months after the Alice case was decided.

Personally, I do think there’s a strong argument to be made that patents remain valuable and useful to startups, Alice notwithstanding. Today I’d like to go over some of the questions I hear most often — such as why you do or don’t need a patent, what can happen if you don’t have one and just how to go about participating in the patent system.

First, what does Alice effectively do to the patent process?

Before the Alice ruling, there was always a lot of discussion around business method patents and whether they would ultimately maintain value in a patent portfolio. The only difference today is that instead of calling a patent application a business method, we are effectively referring to them as Aliceand have a strong indication that they will not hold water. Effectively, these types of patents are those that cover new versions of old businesses, like traditional banking vs. digital banking. However, any real innovation that has substantive invention and is not merely the restatement of a legacy process will and has always garnered value. So, if it is new and you have build a system to bring this novelty to fruition, you have the grounds for protecting your idea.

Why do startups need patents?

Regardless of the outcome of Alice, there are still plenty of reasons for startups to seek patents. Getting a patent can cost you (I’ll talk more about specific costs in the last section of this blog), but not getting a patent could potentially cost you even more — in lost venture capital, market share and other areas, as patent advisory experts David Pridham and Brad Sheafe suggested in an article in these pages last summer.

To me, the number one reason to file a patent is to substantiate your company’s M&A value. While I do not have any objective evidence to support this, I believe that if a patent portfolio aligns with your core value proposition you can see as much as a 30% lift in valuation as a result.

To Pridham and Sheafe’s list of ways patents can benefit startups, I’d also add the potential for patents to generate revenue. You can license your patented technology to other companies to use in their own products and collect royalties for the privilege. In an interesting twist on this, NASA encourages startups to use its patented technologies — any of more than a thousand of them — and does it in a way that both helps startups and generates revenue for NASA. The agency waives the licensing fees on its patented technology to lower the cost barrier to startups, and the participating companies don’t pay royalties until their NASA-technology-powered products start selling.

What could go wrong if a company doesn’t have a patent?

The better question might be what would go wrong if a company doesn’t have a patent, and a competitor does. Just ask Barnes & Noble. After the bookseller started offering a “one-click” process for online purchases, Amazon sued for patent infringement. Barnes & Noble suspended its use of the process, creating a competitive advantage for Amazon. Today, Amazon dominates in retail, while Barnes & Noble struggles to survive.

Clearly, having a patent can protect you from competitors with a potentially legitimate case against you. But what about patent trolls who come after you claiming to have a patent on the technology you’re using? Can having a patent help ward them off? Google certainly seems to think so. The company last year announced a program to give free patents to startups to help them fight patent trolling.

It’s true that patent trolling has decreased dramatically since changes in civil law procedure last year started making it easier for judges to dismiss these types of cases. But patent trolls are still out there, using their own weak patents to go after startups in hopes of getting licensing fees. And if one of them targets your company, it may not matter that there are few others out there; you could still pay a high price to defend your company or settle the claim.

Okay, so you believe you really do need a patent. Now what?

One of the first things the leaders of new startups ask once they’ve decided to seek patents is if they need an attorney. It’s certainly a fair question when your business is just getting on its feet and you have to watch every dollar you spend. Patent attorneys are among the most expensive attorneys, after all.

The simple answer to the question is no, you don’t “need” an attorney. Everything that has to be done to get a patent can be done without paying for legal services. And there are plenty of examples of people who have successfully done just that. But in reality, you may want an attorney for this crucial step in your company’s development. Truly understanding the novelty of your invention or navigating prior art is something an expert can do easily, but for the rest of us it could be like navigating a very gray area.

Consider how much time and work it’s going to take to pursue a patent on your own. For one thing, you’ll have to master a whole new set of skills associated with writing a patent — not to mention the risk that you might get derailed by overlooking an important detail due to your inexperience.

You may very well be better off spending your time going after new business and growing your company’s revenue, and paying a patent attorney to do what he or she is trained to do – especially if the technology you want to patent is likely to attract significant venture capital or licensing revenue. On the other hand, if you’re less certain about the payoff to come, you may do better to limit your hard costs and handle the work yourself. You and your most trusted advisors will have to be the ones to make that assessment.

Only you can decide whether your business would benefit from a patent. I’m obviously not a lawyer and can’t give you legal advice, but I do hope this information helps you make your decision and also helps with next steps if you do decide to pursue a patent.

As the great-grandson of the Mexican general who shot off Pancho Villa’s leg, H.O. embodies the spirit of a true revolutionary. His infectious passion and uncanny ability to predict the future has led him to found many successful start-ups including: Flightlock (acquired by Control Risks), Finetooth (now called Mumboe), and one of the first online non-profit media organizations, the Texas Tribune. He leads the Umbel team with one eye focused on battle tactics, one eye focused on long-term vision, and one eye focused on his iPhone. H.O. studied electrical and biomechanical engineering at the University of Texas at Austin.